About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

MPC Meeting Minutes: Rate Cut Possible in the Future?

In forex, it’s always important for traders to ask the question “why” when looking at price action. It helps traders understand why price moves the way it does, and how it could possibly move in the future. For this reason, it’s a good idea to examine why the Bank of England (BOE) decided to keep rates unchanged and expand its asset purchase program in its latest interest rate decision.

Yesterday, the BOE finally released the minutes of its most recent interest rate decision. The BOE, if you recall, decided to keep rates unchanged and expand its asset purchase program by 50 billion GBP to 375 billion GBP.

Out of the 9 monetary policy committee members, 7 voted in favor of an expansion of the BOE‘s asset purchase program. These 7 members believed that the need for additional stimulus was much stronger this time around since external economic threats stemming from the euro zone debt fiasco kept growing. For one thing, Spain stepped into the debt spotlight lately as rising bond yields put euro zone’s third largest economy at risk of default.

Despite all that, a couple of policymakers namely Spencer Dale and Ben Broadbent voted to keep asset purchases unchanged. According to them, the BOE should wait for the effects of their previous stimulus injection to kick in before adding more.

They also pointed out that the drop in inflation to 2.4% in June, which many took as a sign that there’s room for more easing, might not actually be sustained since it’s just a result of falling global oil prices.

Market participants were taken by surprise when they found out that the decision to increase stimulus wasn’t unanimous. After all, the previous two expansions of the BOE’s asset purchase program were results of unanimous decisions.

Another detail of the minutes that was particularly noteworthy was that BOE policymakers actually had a discussion on whether to cut their benchmark interest rate or not. Come to think of it, how can they even debate about slashing rates further when the benchmark rate is already at an ultra-low of 0.50%?!

Because there was a split decision, I think that we’ll probably see no more easing in the second half of this year. However, the bank debating about cutting the benchmark interest rate is something new to me.

Many economists suggest that the minutes point towards a rate cut in the future. This could be bearish for Cable in the long-term, as demonstrated by its price action yesterday. Right after the release of the minutes, Cable immediately fell 60 or so pips.

At the end of the day though, always remember that this is just speculation and doesn’t point to anything certain. If economic conditions in the U.K. continue to deteriorate, another round of QE could still be implemented.